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Going Vertical: 20th Century Experience for a 21st Century Challenge

Making ERP systems more vertically oriented with industry-specific extensions is the current push in the corporate IT world. Doing vertical software is difficult, but using ESA gives you a head start.

I got a call in the mid-1990s from a manager at Hewlett-Packard who had just been given the task of pushing SAP software and HP hardware in the oil and gas industry. Did I know what is one of the hardest things to account for in transporting North Sea oil? The response quickly followed: Dealing with the change in volume when oil is shipped by tanker from the frigid waters of the North Sea to the relatively warm waters of the Persian Gulf.

“Who knew?” I wondered out loud.

That answer was even quicker in coming, and hence the reason for the call. It turns out that SAP knew a whole lot about this problem, and my friend wanted help in promoting the fact that SAP software “understood” oil and gas better than any other code.

SAP’s expertise came directly from its IS-Oil project, partially funded by Europe’s ESPRIT research program, which pulled SAP and 10 oil and gas companies together to work out the nuts and bolts — and esoterica — of the industry’s processes and unleash them in software. It took barrels full of time and money, and lots of industry cooperation, and it helped lock up the oil and gas vertical for SAP.

Sounds easy? For a single industry, maybe. But if you have ever wondered why “one size fits all” and enterprise software don’t necessarily work well in the same sentence, take a look at the North American Industry Classification System (NAICS), the system used by the federal government to classify the different sectors of the U.S. economy. The 20 individual sectors of the NAICS explode out into hundreds of individual business classifications. It’s all there, from NAICS code 112210 (pig farming) to NAICS code 336414 (guided missile manufacturing).

SAP’s Vertical Dilemma

This, in a nutshell, is the 21st century dilemma for SAP and its competitors: how to replicate projects like IS-Oil with vertically oriented software that’s relevant to both pig farming (don’t laugh, it’s a $10 billion industry in the United States alone) and missile manufacturing, while still maintaining “out-of-the-box” pricing and implementation times. At stake is nothing less than the future of enterprise software, and the IT budgets for millions of companies across the globe.

The problem is two-fold. On the one hand, the horizontal functionality delivered in traditional ERP software has largely reached its competitive zenith. Simultaneously, the technology platforms on which traditional ERP systems are based are quickly becoming outmoded for the task of delivering competitive advantage and innovation. They worked well when their main mission was to deploy big horizontal ERP systems. But in a world where monolithic systems of any kind are more anchor than sail, huge legacy platforms have now become a barrier to deploying the post-ERP generation of software.

The imperative to solve the vertical problems of customers is borne out in data published last spring by McKinsey & Co. A survey of U.S. IT executives showed that ERP was the second most important spending category after IT infrastructure. In addition, within ERP, “industry-specific extensions” was the number one choice for spending, significantly besting “business intelligence” and “general ERP upgrades.” In other words, the survey’s IT executives, who on average are looking to increase their capital expenditures by 13 percent in 2006, are highly interested in spending a good deal of that capital on making their ERP systems more vertical.

These trends, of course, have not gone unnoticed in SAP’s offices in Walldorf, and Palo Alto, as well as in Redwood Shores (aka Oracle-land) and Redmond — home to Microsoft’s now-growing enterprise software business. Each company is spending enormous sums on making their systems more vertical, and hoping that it will not only grow their customer base, but, perhaps more importantly, grow the number of desktops each vendor can “command” within existing customers as well.

But doing vertical software well is hard, very hard. Part of the problem is that it requires deep industry expertise that can be readily transferred to the software world. The other part is that the process of transferring that expertise to software must still yield something that can be readily deployed as a package (i.e., with little need for customization and implementation time modifications). Otherwise, becoming more vertical becomes just another way of enriching consultants, impoverishing IT budgets, and, when the custom software gets a little out-of-date or out-of-spec, infuriating the end users to boot.

SAP’s main advantage in this drive to become more vertical is that its enterprise services architecture (ESA) can serve as a platform for launching a wave of mini-IS-Oil projects. IS-Oil was costly and complex to develop not just because of the business processes it was trying to codify, but because of the monolithic nature of SAP R/3 at the time, which made it hard to reuse and leverage its existing capabilities.

ESA-based development, on the other hand, can allow vertically oriented development efforts to focus uniquely on the business-process issues, and plug in, via Web services, the rest of the SAP functionality, as needed. This is the promise of composite applications: Partners can build applications that deliver unique, highly focused functionality in part by building on existing, easy-to-access services. This capability makes it possible to start going down the NAICS list and delivering those specific functions that make pig farmers and guided missile manufacturers — and every NAICS group in between — more successful than their peers, while still addressing the day-to-day functionality that every business, regardless of its NAICS code, needs to get the job done.

A Winning Strategy

What is still needed is industry-specific expertise, and for that SAP is counting on its own internal knowledge and that of its partners. SAP’s mission for the next few years will be to coax prospective partners to build their vertical applications on SAP NetWeaver and ESA, instead of on IBM WebSphere, Microsoft .NET, eyeon Software’s Fusion, or whatever other alternative presents itself.

It’s a good strategy, built on a solid platform. SAP, with IS-Oil and other initiatives under its belt, is an odds-on favorite to succeed: Unlike some of its competitors, this is a company that has a culture of meeting the needs of vertical industries. That culture, combined with SAP’s ESA, promises to have an impact not just on individual customers, but on the overall global economy, as well.

Looking back on the last decade, it’s also worth noting that SAP’s IS-Oil had another, this time unintended, impact on the global economy. It was the launching point for the career of one Michael Capellas, who at the time was the director of SAP’s Oil & Gas Industry Center of Expertise. This is the same Michael Capellas who would eventually head Compaq, HP, and, until recently, MCI.

As I said to that HP manager some 10 years ago: Who knew?

Joshua Greenbaum is a market research analyst and consultant specializing in the intersection of enterprise applications and e-business. Greenbaum has more than 15 years of experience in the industry as a computer programmer, systems analyst, author, and consultant. Before starting his own firm, Enterprise Applications Consulting (www.eaconsult.com), he was the founding director of the Packaged Software Strategies Service for Hurwitz Group.

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